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In the electronics and semiconductor capital equipment industry, manufacturers typically produce and sell products that often have multiple configurations and require a very substantial amount of testing for customer acceptance. Given the current economic downturn, many SEMICAP manufacturers are in a cost-cutting mode; one of the trends has been to reduce the amount of testing that suppliers do or even bring outsourced processes back in-house. This reduces bill of material cost. On paper, the result is a lower-cost product. The reality is, however, that the increased complexity of the testing required has negated any savings that a company may have gained. There is, however, a much better way to achieve product cost reduction without sacrificing value.
Here is a hypothetical example. ABC Company has shown a loss in the first quarter; its shareholders and board of directors are putting pressure on management to reduce costs. Materials managers begin to pressure ABC’s suppliers. Suppliers suggest reducing the amount of testing that is done or relaxing requirements (or simply agreeing to lower price while reducing testing or relaxing requirements without informing ABC). Parts and assemblies that arrive are of lower quality, but ABC Company doesn’t know it because they don’t do receiving inspection or testing: they have certified suppliers that do this for them. Problems are often detected much later in the process, after hundreds of thousands of dollars are invested in the product. When a problem is detected at this stage, the cost is multiplied many times.
Let us consider some of the costs:
Inventory holding cost. For example, a product costing $500,000 is in inventory an average of two weeks longer as a result. There are 160 of these products produced per year. Given the industry standard holding cost of 30 percent annually, for each product, this results in an annual cost of about $5,800. This gives us an annual cost (or reduction in profits) of $923,000.
Test technician time. Let’s say a test technician costs the company an average (including benefits) of $40 per hour. We will assume that over the two-week troubleshooting period, the tech spends 40 hours troubleshooting the product. This costs the company $1,600 per unit; the result is a reduction in profits of $256,000.
Time for others to process the defective part(s) from each unit. We will assume that an average of 20 hours per unit will be spent processing the part. This includes documentation, transportation through the plant, and shipping. I believe this is a conservative estimate. Using the same $40-per-hour rate, this costs the company $800 per unit, or $128,000 per year.
Based on the above, any savings derived are offset by an annual reduction in profits of $1.307 million! The other more important factor is the increased possibility that one of the defects will not be detected by internal testing, resulting in a defective product being sent to the customer. Anyone who has sold equipment to semiconductor manufacturers knows that they expect and need their equipment to be running with very minimal downtime. Sending defective products to a customer could cost ABC Company millions more in future profits.
What is the solution for companies in similar situations to the one described above? When they are in an economic “up cycle,” the top priority of companies like ABC is responsiveness to demand without much regard for cost. In downturns, the focus becomes cost. Companies like ABC should focus on value engineering, or design for manufacturability (DFM). This involves changing the design of the product to significantly impact cost while maintaining or increasing value to their customers. This can be done using several design for manufacturability methods.
One effective method is a DFM workshop. Such workshops involve design engineers, manufacturing engineers, buyers, quality engineers, and other interested parties meeting for several days and following a process for reducing the complexity of a design. An experienced consultant usually conducts such a workshop. Typical results based on my experience are a 20 to 30 percent reduction in complexity. This typically translates to a corresponding reduction in product cost. In the case of ABC, a 20 percent product cost reduction would translate to $200,000 per unit, or $32 million per year – a number much more significant than any small savings (or significant loss) that might be achieved through bargaining with suppliers.
DFM workshops involve six major steps:
After the workshop, the team should meet periodically to status the action plan and drive the implementation phase to completion. In three to six months, the product cost savings should begin to be realized.
In an economic downturn, organizations can use DFM to achieve their goal of lower cost without sacrificing value to their customers. This underutilized tool can be applied across all industries and typically results in 20 to 30 percent reductions in cost. Instead of going with their initial inclinations to squeeze suppliers and reduce value to decrease cost, management teams should champion DFM efforts in their organizations to reduce cost and add significantly to the bottom line.
About the author:
Darren Dolcemascolo is an internationally recognized lecturer, author and consultant. As senior partner and co-founder of EMS Consulting Group, he specializes in productivity and quality improvement through lean manufacturing. Dolcemascolo has written the book Improving the Extended Value Stream: Lean for the Entire Supply Chain, published by Productivity Press in 2006. He has also been published in several manufacturing publications and has spoken at such venues as the Lean Management Solutions Conference, Outsourcing World Summit, Biophex, APICS and ASQ. He has a bachelor of science degree in industrial engineering from Columbia University and an MBA with graduate honors from San Diego State University. To learn more, visit www.emsstrategies.com or call 866-559-5598.